Because contractionary fiscal policy raises domestic interest rates, it can be used to fix the value of the domestic currency above the market equilibrium rate.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy, which involves reducing government spending or increasing taxes, can indeed raise domestic interest rates. However, fixing the value of the domestic currency above the market equilibrium rate typically involves exchange rate interventions by the central bank, not fiscal policy measures.

Because Contractionary Fiscal Policy Raises Domestic Interest Rates, It Can